CA Foundation · Quantitative Aptitude · Mathematics of Finance
Patel Foods invests ₹1,00,000 in a project that returns ₹1,21,000 at the end of 2 years, with no other cash flows. What is the internal rate of return (IRR) of the project?
The IRR is 10% per annum. IRR is the rate that makes the present value of the inflow equal to the outlay. Here (1+r)^2 equals 1,21,000/1,00,000 = 1.21, so 1+r = 1.1 and r = 10%, accounting for annual compounding.
- A9%
- B10%Correct
- C11%
- D12%
Explanation
IRR is the rate r at which 1,21,000 / (1+r)^2 = 1,00,000, so (1+r)^2 = 1.21 and 1+r = 1.1, giving r = 10%. A tempting wrong answer, 10.5%, would result from simple averaging of 21% over 2 years, but that ignores compounding. Check: 1,00,000 × 1.1 × 1.1 = 1,21,000.
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